Northern Rock has painted an extremely gloomy picture of the housing market and said it would shrink its balance sheet by encouraging existing customers to leave. Financial Times

The bank issued one in five new mortgages in the first half of 2007, but now it will encourage borrowers who want to refinance their mortgages to leave as it seeks to shrink its £107bn balance sheet.

About £25bn to £30bn of the balance sheet relates to homeowners who will have to refinance loans this year. Northern Rock is hoping that 60% of these customers will take their mortgages elsewhere.

Ron Sandler, executive chairman, said the bank would write about £5bn of mortgages in 2008, rather than the £30bn it wrote in 2007.

However, he added that new volumes would be sufficient to maintain Northern Rock’s presence in the market, maintain its relationship with mortgage brokers and add new mortgages to Granite, the bank’s securitisation vehicle.